Federal Reserve Chair Jerome Powell on Friday offered cautious signals about possible interest rate cuts, stressing that economic uncertainty is complicating the Fed’s work.
Speaking at the central bank’s annual Jackson Hole meeting, Powell pointed to “sweeping changes” in U.S. tax, trade, and immigration policy as factors shifting the balance of risks between inflation and employment.
While he acknowledged that the labor market remains strong and the economy resilient, Powell warned that tariffs could revive inflationary pressures and push the U.S. toward stagflation.
Policy Conditions and Market Reaction
The Fed’s benchmark interest rate currently stands between 4.25% and 4.5%, a full point lower than a year ago. Powell said this position gives policymakers room to “proceed carefully” when considering adjustments.
“Policy is in restrictive territory, and the shifting balance of risks may warrant adjusting our stance,” Powell said, stopping short of committing to cuts but hinting at possible changes ahead.
Markets responded swiftly. The Dow Jones surged more than 600 points following the remarks, while yields on the 2-year Treasury note dropped to around 3.71%.
President Donald Trump has been openly demanding aggressive cuts, often criticizing Powell and his colleagues. Powell avoided direct reference to these calls but emphasized that the Federal Open Market Committee (FOMC) makes decisions based solely on data, not politics.
“FOMC members will never deviate from that approach,” Powell said, highlighting the importance of central bank independence.
Tariffs and Inflation Risks
Powell said the ultimate effect of tariffs on inflation remains uncertain, noting they may prove temporary but could also prolong supply chain disruptions. “It will continue to take time for tariff increases to work their way through supply chains and distribution networks,” he said.
The Trump administration has argued that tariff-related price increases will be short-lived and warrant lower rates. Powell acknowledged that such an outcome is possible, but said the Fed must remain flexible given the wide range of potential scenarios.
Powell also reflected on the Fed’s five-year policy framework review. He admitted that the 2020 switch to “flexible average inflation targeting” proved inadequate once inflation spiked to 40-year highs.
“The idea of an intentional, moderate inflation overshoot proved irrelevant,” Powell said, calling the past five years “a painful reminder” of how inflation harms households least able to bear higher costs.
The Fed reaffirmed its 2% inflation target, despite critics who argue the goal is either too rigid or too high. Powell insisted it remains critical to keep long-term expectations anchored.
Author’s Opinion
Powell is buying time, but markets and the White House won’t wait indefinitely. By keeping the door cracked open to cuts without firmly committing, he risks fueling market volatility while appearing evasive. At some point, the Fed will have to either push back on political pressure or align with it, but straddling both sides is not a long-term strategy.
Featured image credit: Federalreserve via Flickr
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